The Enigma That Is Bitcoin: Contradictions … And a Glimpse of What Might Be Possible

Bitcoin is a bit of a head-scratcher. Its US dollar value has fallen about 30% year-to-date, and has sunk about 80% since peaking in late 2013. The digital currency is a long way from mainstream consumer adoption. Yet, its enthusiasts have had some reasons to be optimistic about bitcoin’s long-term prospects.

Coinbase, a bitcoin wallet provider, made headlines earlier this week when it closed on a $75 million private financing deal. Several prominent venture capitalists, including Coinbase investor Marc Andreessen, retain their faith in bitcoin’s future. Coinbase gained further legitimacy with the participation in its latest financing round of several mainstream financial institutions, including the New York Stock Exchange (Intercontinental Exchange, Inc. (ICE)).

The disconnect between bitcoin’s lousy recent trading performance, and its long-term potential to support a new payments infrastructure, has attracted media attention. An article published by CoinDesk nicely summarizes the 2015 outlook for bitcoin by underlining this seeming paradox: “Ecosystem Grows Despite Price Decline.”

Other bitcoin-related contradictions have emerged. Digital currencies have the potential to facilitate micropayments: small-denomination transactions that would be too costly to process with traditional credit card and inter-bank money transfer systems. Should they succeed, micropayment platforms, like Bitwall, could offer bloggers and other publishers an opportunity to be compensated for their online content — something that has been difficult to accomplish with traditional paywalls.

In a recent blog article, Balaji Srinivasan, a general partner at Andreessen Horowitz, observed how bitcoin’s role in enabling financial transactions is likely to evolve from small-scale to larger-scale applications. While “bitcoin is good for transactions that are very small, very large, very fast, very international, and/or very automated … it probably starts with low stakes, digital goods that the dollar can’t colonize right now due to the requirements of credit card companies.”

Yet, for all of the potential for bitcoin to facilitate small-denomination payments, consumers still can’t readily find small merchants in their neighborhood, like restaurants and stores, that accept bitcoin. Rather, it’s been large merchants, like Microsoft (MSFT) and Dell, that have drawn the attention of bitcoin watchers by announcing their acceptance of the digital currency as a form of payment.

For the time being, the practical applications of bitcoin may be difficult to explain to those unfamiliar with the world of digital currencies. Try explaining this to your parents (or friends, or spouse, or children): in order to spend bitcoin at a brick-and-mortar establishment, you first have to set up a digital wallet, and then find a merchant who accepts bitcoins.

For those already familiar with bitcoin-based services, like ChangeTip, and for other individuals who are already acquainted with the fintech tools being built on top of the bitcoin blockchain, its long-term potential is easier to understand. Of course, for diehard bitcoin enthusiasts, the long-term prospects for bitcoin’s growth and acceptance have never seemed more promising.